Team Beats Collusion

AYÇA ÖZDOĞAN

TOBB-ETU

Date : Friday, 6 April 2012

Hour : 15:00

Place: Economics Department Faculty Lounge, Natuk Birkan Building

Abstract:
This paper analyzes optimal contracts in a linear hidden-action model with
normally distributed returns possessing two moments that are governed
jointly by two agents, who can observe each others’ effort levels and draft
enforceable side-contracts on chosen effort levels and realized returns.
After showing that standard constraints, resulting in incentive-contracts,
may fail to ensure implementability, we examine (centralized)
collusion-proof contracts and (decentralized) team-contracts. We prove that
optimal team-contracts provide the highest implementable returns to the
principal. In other words, the principal may restrict attention to
outsourcing/decentralization without any loss of generality. Moreover,
situations in which incentive-contracts are collusion- proof, thus
implementable, are fully characterized. (joint with Mehmet Barlo)
—